What is estate planning?

Estate planning is the process of arranging your affairs now to ensure there is an efficient and effective distribution of your estate after your death. An estate plan is designed to help to protect your family and loved ones minimise taxation upon transfer of assets in a legal and logical manner as well as ensuring your wishes are followed.

A Will can help ensure your wishes are carried out

Leaving a Will is the most basic of estate planning strategies. A professionally drafted Will should ensure your estate is distributed to your beneficiaries in accordance with your wishes. In your Will you are able to:

  • make gifts of assets or funds that form part of your estate
  • establish trusts for the ongoing management of your assets for your beneficiaries
  • appoint an executor and trustee and
  • appoint guardians (for example, to look after your minor children).

Considerations for minimising tax for your beneficiaries

  • Nominate your spouse and dependant children to be the recipients of your superannuation. Death benefits paid to your dependants are tax-free.
  • Incorporate a testamentary trust into your Will. This could create capital gains tax savings as well as ongoing income tax savings for your beneficiaries, especially if you have young children or grandchildren. A testamentary trust comes into force upon your death and allows flexibility for the trustee to decide which of the allowed beneficiaries will receive distributions each year.
  • Consider holding your key investments (other than your family home) in a family trust. This may create tax savings now as well as ongoing tax savings for your beneficiaries, note legal and tax advice is required.
  • Bequeath assets with low or no capital gains tax liabilities to beneficiaries with high marginal tax rates and vice-versa.

How is superannuation treated upon death?

Money in superannuation and account-based pensions should be gifted to dependants because they will pay little or no tax on the benefit, as shown above.

A dependant includes a spouse, children under the age of 18, or someone financially dependent upon you or was living in an interdependency relationship with you.

Non-dependants (such as adult children) must take all death benefits from superannuation and account-based pensions as a lump sum and pay tax of up to 17% (including Medicare) on the taxable component. If there is a life insurance component, it could be taxed at up to 32% (including Medicare).

Choosing the right executor

The executor is responsible for making sure that the instructions in your Will are carried out, and can be: 

  • one or more persons, or 
  • a trustee company.

Your executor should be someone you trust and who is willing to take on the work and responsibility. If the executor you have chosen pre-deceases you or is unwilling to act as executor, your estate may not be distributed according to your wishes.

What cannot be in a Will?

  • An asset owned by a discretionary trust.
  • Life insurance policies where you have nominated someone as a beneficiary.
  • Superannuation and retirement income streams which have current ‘binding nominations’ to be distributed directly to dependants, or income streams which are ‘reversionary’ or where the trustee uses discretion to pay a beneficiary directly.
  • Assets which have ‘joint tenancy’.

How can you fund your estate planning objectives?

Life insurance can be an important instrument in helping you meet your estate planning objectives.

  • You may wish to purchase enough life insurance to ensure your spouse and children have enough money to pay off your debts, meet large expenses (such as school fees) and continue to live a comfortable life.
  • If your estate will have large taxation liabilities, you may be able to purchase a life insurance policy so your beneficiaries can use this money to pay out your estate’s taxation liability without eating into their inheritances.
  • If you are in business with partners, a life insurance policy on each partner may help protect the viability of the business and the financial position of the surviving partners if one of you were to die.
  • If it is important that your dependants are given equal shares of your estate, a life insurance policy can be used to equalise your estate.

What is Estate Equalisation?

A common estate planning dilemma is where you want to gift your main asset (e.g. the business or home) to one of the children when you die because, for example, the child may have helped build the business.

Unfortunately, this may mean other children will be disadvantaged financially if other assets are not worth nearly as much as this key asset. If you do not wish to create this inequality nor want the asset to be sold to create an equal distribution, you could use insurance to equalise the value of your estate.

Case Study- Estate Equalisation

John is a single divorcee and has a son and a daughter. John owns a successful business which has a bright future. John’s daughter has been helping him manage the business since she left university and shares his passion for it. On the other hand, John’s son has interests elsewhere and has chosen to not participate in the business. 

In the event of his death, John would like the business to pass to his daughter. However, he recognises this would be unfair to his son because his other assets are worth only a fraction of his business. 

The solution for John is to increase his life insurance to the value of his business minus the value of his other assets. On his death, the insurance payout and other assets could be given to his son and the business could be transferred to his daughter. This ensures John creates a fair and equal distribution of his assets. Both of his children will be pleased with the financial outcome and his wish for the business to remain in the family will be fulfilled.

How can you minimise the chance of your estate being challenged?

Some beneficiaries may be able to challenge the estate distribution if they feel they were not treated fairly. To minimise the risk of this happening, you could consider:

  • ensuring your Will is current, comprehensive and fair
  • holding your key assets in a family trust (as these assets are owned by the trust and not you, their ownership is not affected by your death and are not subject to challenge)
  • having a binding nomination for your superannuation to be transferred to dependants, or
  • giving your executors adequate power to carry out your wishes.

How can you protect your assets for the next generation?

If you are concerned your dependants do not have the ability to manage or protect your assets after you die – or if you feel the assets you bequeath may be at risk due to possible bankruptcy or legal action, you could consider using a family or testamentary trust.

The trustee appointed legally owns placed assets. The assets then may be protected from dependent’s creditors and also from a dependent who may not be capable of correctly managing money. You will need to appoint someone you trust to act as trustee or use the services of a trustee company.

Checklist – Implementing an Effective Estate Planning Strategy

It is important your estate planning strategy ensures that those you care about are well provided for. Some examples of the issues you should consider are: 

Protecting assets in divorce

With the high rate of divorce, many parents are concerned the inheritance they leave to their children could end up in the hands of their son-in-law or daughter-in-law if their child’s marriage breaks down.

If a child receives an inheritance in their own name, that inheritance will generally form part of the child’s assets, and therefore part of the matrimonial property. This could then be available to the Court for distribution upon the divorce proceedings.

However, if the assets are distributed to a properly structured testamentary trust, the inheritance may be kept apart and protected from a divorce property settlement. It is imperative that the trust be drafted appropriately to ensure this strategy is successful in protecting the assets.

What is an Enduring Power of Attorney?

An enduring power of attorney is a formal instrument by which one person empowers another person to represent them or to act in their stead for certain purposes. For example, if you are unable to manage your own affairs due to serious illness or accident, you may need someone to look after your finances. An enduring power of attorney will give that person the authority to act on your behalf. If you do not have a power of attorney, the public trustee may be given the responsibility of handling your finances.

What is a Life Estate?

A life interest is restrictive in that it prevents the beneficiary from selling the property that produces the income before the beneficiary’s death. For example, you may wish to create a life estate in favour of your current partner.

What is a life interest?

You could include a life interest in our Will which is a form of testamentary trust where you grants an individual, a lifetime benefit from an asset or the income from an asset of your estate. For example, you may own your principal residence and be in your second or third marriage. Upon death you may wish to pass the property to your biological children but you still want to ensure your current spouse has a roof over his or her head for the rest of their lifetime. You could establish a life interest in favour of your spouse in your will. Once the surviving spouse has passed away, the property is then passed to your children as per the terms of the will. A life interest ensures that your property can still pass through your bloodline, without any sacrifice of standard of living of your surviving spouse.

What is a Buy-Sell Agreement?

A buy-sell agreement is used by partners in a business to ensure that the business interest of one owner will be able to be sold to the other owners when a trigger event occurs, such as a death of a partner. Insurance is often used to finance a buy-sell agreement to ensure the surviving partners have sufficient funds to buy the deceased partner’s share of the business. This means the deceased partner’s estate is fairly compensated for giving up their rights to the business.

Case Study One: Ensuring your estate plan has sufficient funding

Liz and Stuart have two small children and a large mortgage. Stuart’s small business is starting to succeed and life is looking good for the family. Unfortunately Stuart dies in an accident and while the mortgage is covered by his life insurance, there is little left over to help Liz support herself and their two children. Liz therefore has to seek employment, leaving her less time to spend with her children. 

Stuart and Liz did not have an effective estate plan. They failed to provide adequate funding via life insurance in the event that one or both of them died.

Case Study Two: Protecting your assets by ensuring they pass to those you intend

Jack and Penny own an investment portfolio that they built up over a lifetime of hard work. When they both pass away they leave their estate to their only daughter Mary. 

Mary is married to James and they have three children. Mary and James’ business, is experiencing financial difficulty as James often squanders the profits. Finally the business goes into liquidation. 

As Mary and James had personally guaranteed the debts of the business they lose their home and all of the inheritance from Jack and Penny. If Jack and Penny had made a provision in their Will for the establishment of trusts they may have protected their assets from creditors and ensured that their grandchildren benefited from their estate.

This information has been produced by Australian Unity Personal Financial Services Ltd (‘AUPFS’) ABN 26 098 725 145, AFSL & Australian Credit Licence 234459. Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. It does not represent legal, tax, or personal advice and should not be relied on as such. You should obtain financial advice relevant to your circumstances before making investment decisions. AUPFS is a registered tax (financial) adviser and any reference to tax advice contained in this document is incidental to the general financial advice it may contain. You should seek specialist advice from a tax professional to confirm the impact of this advice on your overall tax position. Nothing in this document represents an offer or solicitation in relation to securities or investments in any jurisdiction. Where a particular financial product is mentioned, you should consider the Product Disclosure Statement before making any decisions in relation to the product and we make no guarantees regarding future performance or in relation to any particular outcome. Whilst every care has been taken in the preparation of this information, it may not remain current after the date of publication and AUPFS and its related bodies corporate make no representation as to its accuracy or completeness. Published: November 2018 © Copyright 2018